Weekly Viewpoint: Putting A Selloff In PerspectiveSubmitted by Castlebar Asset Management on August 23rd, 2015
There is no sugar coating it. Last week was a bad week for stock in the US and around the world. The S&P 500, which represents the 500 largest companies in the US, declined 5.7%. This was its worst weekly decline in almost 4 years (September 23, 2011.) Markets around the world followed suit.
So what caused stocks to drop?
The US markets have largely brushed off a lot of negative news happening outside the US for the past few months. Last week things started to catch up with us. There are concerns about global economic growth not accelerating as expected in the second half of this year. Much of this concern is stemming from China and emerging markets. China has managed to engineer their economic growth well over the past 20+ years. There are growing signs that they don’t have the ability to control things as they have in the past. This has caused a selloff in emerging markets, a decline in the commodity markets and contributed to some of the declines in energy prices. In our backyard, corporate earnings have been underwhelming and concerns over weakness in the energy sector pushed some investors to the sidelines last week.
Corrections happen regularly in stock bull markets. We just have not had one in a while. A correction in stocks is defined as a 10% decline. On average since 1957 there has been a correction every 1.5 years. More recently, they have been spaced out longer than that but it is normal for us to see down moves even in bull market. From record highs stocks have seen 48 pullbacks of 5% since 1957. 17 times stocks sold off 10% and 9 time they fell over 20%. The one thing that occurred in each instance; the market recovered.
The magic 10% decline has been elusive and stocks have not had a 10% pullback since October 3, 2011. It seems like many on Wall Street are rooting for it to happen. Why is 10% so important… I have no idea. It is a round number that is easy to reference I suppose.
What does this mean moving forward?
I don’t own a crystal ball but the next few weeks could be choppy. Market sentiment has shifted negative and it looks like a 10% correction is in the cards. The market only has to fall another 2.5% to make that happen. With that being said this is not the end of the bull market. Stock valuations are looking better at this point. They are not cheap but are now in line with their historic valuation metrics going back to 1990. As long as inflation remains lows the valuation range we are operating in is sustainable. There seems to be more negative items for stocks but that is usually when things are close to turning the corner.
I would not alter from your long term plan. Be patient and don’t try to time the market. Things may get worse before they improve but your long term allocation should not deviate because of anything that occurred last week.
Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.